Eligible vs Non Eligible Dividends: What the Gap Costs in BC

On this page

• Eligible vs Non Eligible Dividends: The Difference in One Table
• Why the Gross Up and Dividend Tax Credit Exist
• Which Dividends Your Corporation Can Pay as Eligible: The GRIP Account
• 2026 Combined BC Tax Rates on Each Dividend Type
• Worked Example: $50,000 Paid as Eligible vs Non Eligible
• How Each Type Appears on Your T5 and on the T2
• Excessive Eligible Dividend Designations and Part III.1 Tax
• Choosing the Right Mix With Salary in an Owner Manager Plan
• FAQ: Eligible and Non Eligible Dividends
• Get Your Owner Compensation Mix Reviewed Before Year End

Eligible vs Non Eligible Dividends: The Difference in One Table

If you own a corporation in BC and you pay yourself dividends, you have probably noticed two different lines on your T5 and wondered why one costs you so much more tax than the other. Here is the short version.

Non eligible dividends (CRA calls them “other than eligible”) come out of profits taxed at the small business rate (11% in BC). The corporation paid very little, so you pay more personally. Top rate in BC for 2026: 48.89%.

That is a gap of about 12 to 16 percentage points, depending on your income. On a $50,000 dividend at the top bracket, it is roughly $6,175 of real money.

Here is the part most people get wrong though: you do not get to choose. Your corporation can only pay eligible dividends up to the balance in an account called GRIP, and most small BC corporations that stay under the $500,000 small business limit have a GRIP balance of zero. So the question is usually not “which should I pay” but “do I even have the room, and am I designating it correctly.”

Let us go through it properly.

 

	Eligible dividends	Non eligible dividends
CRA’s official name	Eligible dividends	Dividends other than eligible
Where the profit came from	Income taxed at the general corporate rate (27% in BC)	Income taxed at the small business rate (11% in BC)
Gross up added to your income	38%	15%
Federal dividend tax credit	15.0198% of the grossed up amount	9.0301% of the grossed up amount
BC dividend tax credit	12% of the grossed up amount	1.96% of the grossed up amount
BC top combined rate, 2026	36.54%	48.89%
T5 boxes	24, 25 and 26	10, 11 and 12
What limits the amount	Your GRIP balance	Nothing, this is the default
Who usually gets them	Shareholders of larger CCPCs, public company investors	Owners of typical small BC corporations

Two things worth flagging right away. First, publicly traded Canadian shares almost always pay eligible dividends, which is why investors love Canadian dividend stocks in a non registered account. Second, if your corporation earns passive investment income, that money does not create GRIP. It goes down a completely different path involving RDTOH and refundable tax.

 

Why the Gross Up and Dividend Tax Credit Exist

The whole system exists to stop the same dollar being taxed twice: once in the corporation, then again in your hands.

Think of it in two steps:

1. The gross up is a rewind button. It takes the dividend you actually received and inflates it back up to roughly what the corporation earned before it paid tax. A $1,000 eligible dividend gets reported as $1,380 of income.
2. The dividend tax credit is the receipt. It gives you credit for the tax the corporation already paid on that money.

Here is the actual math on $1,000 of eligible dividends for someone in BC’s top bracket:

Step	Amount
Actual dividend received	$1,000
Grossed up (×1.38), this is what goes on your return	$1,380
Federal tax at 33%	$455.40
Less federal dividend tax credit (15.0198% × $1,380)	($207.27)
BC tax at 20.5%	$282.90
Less BC dividend tax credit (12% × $1,380)	($165.60)
Total tax	$365.43 (36.54%)

Run the same exercise on a non eligible dividend and the credits are much thinner (9.0301% federally and a nearly symbolic 1.96% provincially), which is exactly why you land at 48.89% instead.

When the system works properly, the corporate tax plus your personal tax should add up to roughly what you would have paid if you had just earned the money personally. It is called integration, and in BC it lands surprisingly close. More on that in the worked example.

 

Which Dividends Your Corporation Can Pay as Eligible: The GRIP Account

GRIP stands for General Rate Income Pool. It is a running balance your CCPC tracks on Schedule 53 of the T2, and it is the hard ceiling on how much you can designate as eligible.

What adds to GRIP:

• Active business income taxed at the general rate, meaning profit above the $500,000 small business limit. Roughly 72% of that full rate income gets added.
• Eligible dividends your corporation received from other corporations (including public company shares held in the corp).
• GRIP inherited on an amalgamation or a wind up of a subsidiary.

What does not add to GRIP:

• Income that got the small business deduction. This is the big one for most owners.
• Passive investment income (interest, rents, taxable capital gains). That flows through the RDTOH system instead.
• Capital dividends, which come out of the Capital Dividend Account and are tax free anyway.

 

What reduces GRIP: every eligible dividend you pay.

So the practical rule of thumb: if your corporation has never earned more than $500,000 of active income in a year and does not hold Canadian dividend paying shares, your GRIP is almost certainly nil, and every dividend you pay yourself is non eligible. That is normal and it is not a mistake.

Non CCPCs work in reverse. A public corporation or a Canadian corporation controlled by non residents can pay eligible dividends by default, and is limited instead by a balance called LRIP (Low Rate Income Pool). Different account, same idea, opposite direction.

One more requirement that trips people up: designating a dividend as eligible is not automatic. Under subsection 89(14) you have to notify the shareholder in writing, at or before the time the dividend is paid, stating the amount being designated. For a one person corporation, a directors’ resolution that names a dollar figure does the job. Doing it after the fact on the T5 alone is not what the rule asks for.

 

2026 Combined BC Tax Rates on Each Dividend Type

Here are the 2026 combined federal and BC marginal rates. Find the bracket your taxable income already sits in, then read across.

Taxable income (2026)	Eligible dividends	Non eligible dividends	The gap	Extra tax per $10,000
$58,524 to $100,728	7.56%	19.80%	12.24 pts	$1,224
$100,729 to $115,648	7.56%	23.02%	15.46 pts	$1,546
$117,046 to $140,430	15.55%	31.40%	15.85 pts	$1,585
$140,431 to $181,440	18.88%	34.17%	15.29 pts	$1,529
$181,441 to $190,405	23.43%	37.96%	14.53 pts	$1,453
$190,406 to $258,482	26.32%	40.37%	14.05 pts	$1,405
$265,546 and above	36.54%	48.89%	12.35 pts	$1,235

Notice something odd: below about $58,500 of taxable income, eligible dividends are taxed at 0% in BC, and can even generate a small negative rate because the credit is bigger than the tax. This is why retired shareholders with modest income and a corporation holding Canadian shares can pull out eligible dividends almost tax free. It does not work the same way for non eligible dividends, where the rate is already close to 20% at that income level.

Also worth knowing: the gross up inflates your net income, not just your taxable income. A $1,000 eligible dividend adds $1,380 to the number CRA uses for the OAS recovery tax, income tested credits and the age amount. If you are near the 2026 OAS clawback threshold of $95,323, eligible dividends can quietly cost you more than the rate table suggests.

 

Worked Example: $50,000 Paid as Eligible vs Non Eligible

Scenario 1: the shareholder is already in BC’s top bracket.

	Eligible	Non eligible
Dividend paid	$50,000	$50,000
Personal tax	$18,270 (36.54%)	$24,445 (48.89%)
Cash in your pocket	$31,730	$25,555

Difference: $6,175 on the same $50,000.

Scenario 2: the shareholder has $150,000 of other income and takes a $20,000 dividend.

	Eligible	Non eligible
Dividend paid	$20,000	$20,000
Personal tax	$3,776 (18.88%)	$6,834 (34.17%)
Cash in your pocket	$16,224	$13,166

Difference: $3,058.

 

Now here is the part that changes how you should think about all of this. Those numbers only look at your tax bill. Add the corporate tax back in and the picture flips:

Starting with $100,000 of corporate profit	Small business income (non eligible)	General rate income (eligible)
Corporate tax	$11,000 (11%)	$27,000 (27%)
Available to distribute	$89,000	$73,000
Personal tax at BC top rate	$43,512	$26,674
Cash in your pocket	$45,488	$46,326
Total tax paid	54.5%	53.7%

Compare both to the 53.50% you would pay on straight salary and you can see the system is doing its job. Eligible dividends are not a loophole and they are not “cheaper money.” They just shift where the tax gets collected. The reason small business income still wins in practice is deferral: if you leave the profit in the corporation instead of paying it out, you are sitting on money that has only been taxed at 11%, and you get to invest the difference.

 

How Each Type Appears on Your T5 and on the T2

On the T5 slip you issue to yourself as a shareholder:

Box	What goes in it
10	Actual amount of non eligible dividends
11	Taxable amount (box 10 × 1.15)
12	Federal dividend tax credit on non eligible dividends
24	Actual amount of eligible dividends
25	Taxable amount (box 24 × 1.38)
26	Federal dividend tax credit on eligible dividends

If you paid both types in the same year, both sets of boxes get filled on the same slip.

Deadline: the T5 slip and the T5 Summary are due by the last day of February following the calendar year the dividend was paid. Late slips carry a per slip penalty starting at $100 and climbing with the number of slips, so this is not a deadline to be casual about.

On the T2 corporate return, you will be dealing with Schedule 3 (dividends paid and received) and Schedule 53 (the GRIP calculation). Schedule 53 has to be filed if you paid an eligible dividend or your GRIP balance changed during the year. You can also check your GRIP balance through CRA My Business Account or Represent a Client, which is the fastest sanity check before you designate anything.

 

Excessive Eligible Dividend Designations and Part III.1 Tax

This is the expensive mistake, so it is worth understanding before you sign anything.

If you designate more as eligible than your GRIP balance supports, CRA charges Part III.1 tax at 20% of the excess, calculated on Schedule 55. It is not a penalty you can argue your way out of, and it is charged to the corporation on top of whatever you already paid personally.

If CRA concludes the over designation was part of a deliberate scheme rather than an honest miscalculation, the rate jumps to 30% on the whole designated dividend, not just the excess.

 

The fix, if it was an honest error: subsection 185.1(2) lets the corporation elect to treat the excessive amount as an ordinary (non eligible) dividend instead. Two conditions:

• Every shareholder who received, or was entitled to receive, that dividend has to concur with the election in writing.
• The election has to be filed within 30 months of the day the dividend was paid.

 

The election is not available for amounts hit with the 30% rate. And with multiple shareholders, it has to be applied proportionally across all of them, not streamed to just one person.

The practical takeaway: confirm the GRIP balance before the resolution is signed, not when the T2 is being prepared eight months later.

Maxpro Financials verifies GRIP balances against CRA records and prepares the resolutions and T5 slips for owner managed corporations across BC and Alberta, so the eligible room you think you have is the room you actually have.

 

Choosing the Right Mix With Salary in an Owner Manager Plan

Once you know which type of dividend you can pay, the bigger question is how dividends fit alongside salary. A few things that actually move the needle:

• Salary creates RRSP room, dividends do not. Earned income of about $180,000 is what it takes to max the RRSP contribution limit. If retirement saving outside the corporation matters to you, that argues for salary.
• Salary means CPP on both sides. You pay the employee and employer share, which feels like a cost but is also a guaranteed indexed pension. Dividends skip CPP entirely, which is cheaper today and thinner at 65.
• Salary is a corporate deduction, dividends are not. Salary reduces the corporation’s taxable income. Dividends come out of after tax profit.
• Watch the small business limit. Paying salary to bring active income under $500,000 keeps you in the 11% bracket. Paying above it builds GRIP, which lets you pay eligible dividends later. Neither is automatically better.
• TOSI applies to dividends, not reasonable salary. Dividends to a spouse or adult child can be taxed at the top rate under the tax on split income rules unless a specific exception applies. Salary for work actually performed is judged on reasonableness instead.
• Passive income grinds the limit. More than $50,000 of passive investment income in the corporation starts reducing your small business deduction, which pushes more income to the general rate, which in turn builds GRIP. The accounts are connected.

There is no single right answer here, and anyone who gives you one without looking at your numbers is guessing.

 

 

FAQ: Eligible and Non Eligible Dividends

Can I just choose to pay eligible dividends to save tax?

No. You can only designate up to your GRIP balance. Designating more triggers Part III.1 tax at 20% of the excess.

How do I find out my GRIP balance?

Check Schedule 53 of your most recent T2, or log into CRA My Business Account (or ask your accountant to pull it through Represent a Client). Confirm it before you sign a dividend resolution.

My corporation has always been under $500,000 of income. Do I have any GRIP?

Almost certainly not, unless it received eligible dividends from other corporations, for example from Canadian shares held inside the corp.

Are eligible dividends better than non eligible overall?

Personally, yes. Overall, barely. The corporation paid 27% instead of 11% to create them, so total tax lands at roughly 53.7% versus 54.5% in BC. The real advantage of small business income is deferral, not the final rate.

Do I still have to file a T5 for a small dividend?

Yes. A T5 is required once dividends paid to a recipient reach $50 in the year, and it is due by the last day of February.

Does the gross up affect anything other than my tax bill?

Yes, and this catches retirees. The grossed up amount (not the cash you received) goes into net income, which drives the OAS recovery tax, the age amount and other income tested credits. The 2026 OAS threshold is $95,323.

Are dividends from my Canadian stocks eligible?

Dividends from Canadian public companies are almost always eligible. Foreign dividends are neither, they get no gross up and no dividend tax credit, and they are taxed like regular income.

Can my holding company pay eligible dividends?

Only if it has GRIP, which usually means it received eligible dividends from an operating company or from public shares. A holdco with only passive income generally has none.

I designated too much last year. Is it fixable?

Often yes. Subsection 185.1(2) lets you elect to treat the excess as a non eligible dividend, if every affected shareholder concurs and you file within 30 months of the payment date. It is not available if the 30% rate applies.

Do eligible and non eligible dividends go on different lines of my T1?

They flow from different T5 boxes but end up in the same general area of your return, with the dividend tax credit claimed separately for each type. Tax software handles it once the boxes are entered correctly.

 

Get Your Owner Compensation Mix Reviewed Before Year End

Dividend planning is one of the few things in tax where the decision is cheap and the mistake is not. A wrong designation costs 20% of the excess. A salary and dividend mix that ignores your RRSP room or the small business limit quietly costs more than that every year, just less visibly.

If you own a corporation in BC or Alberta, Maxpro Financials can review your GRIP position, prepare the resolutions and T5 slips properly, and set your compensation mix for the year before the numbers are locked in. Most of this work is far easier in November than in March.

Book a consultation or call BC +1 (778) 951 1269 / Alberta +1 (403) 437 6016.